Bank accounts: trivial or not so much?
If you live in Brazil, you have probably noticed a recent increase in the presence of beggars as a result of the crisis. Usually, I bypass them when I’m walking on the street or stopping by red light; however, a few weeks ago, I had an unusual interaction with a man who was asking for some change. “It’s ok if you carry no money with you, you can make me a PIX.” If you are not familiar, PIX is a free immediate money transaction that has recently been implemented in Brazil to facilitate daily payments and transfers. I was taken by surprise, as the last time I heard about something like that was in a conversation with a Chinese friend who lived in Shanghai and said that beggars use QR codes there to receive money via WeChat. Given how recent that conversation was, I had never thought something similar would start taking place in Brazil so soon.
This episode stuck to my mind until I finally figured out the reason for being surprised: a bank account is needed to receive a transfer! And, until some time ago, not only would one face a significant bureaucracy to open an account but would also have to deal with monthly costs to keep it open, totally incompatible with the circumstances to which beggars are usually exposed.
Bank accounts have become much more accessible throughout the past few years, and the number of banked people across the globe has been steepening. However, given that access to an account usually requires internet access, underdeveloped countries naturally have, on average, fewer financially included people. According to the World Bank, for example, South Sudan, the Central African Republic, Afghanistan, and Niger barely reached the 20% mark in 2017. However, despite being small, this number was far superior from the beginning of the previous decade, when less than 10% of the population had a bank account in all these countries.
Financial inclusion is a one-way road. With credit cards replacing cash, financial transactions becoming increasingly simpler, and more people having access to the internet and financial services, a broad range of opportunities arise for new companies to emerge with financial solutions based on technology never thought before. These companies are called fintech.
A replacement for banking services
The term “fintech” is considerably wide and comprises various types of companies focused on creating, expanding, and optimizing financial services through technology. As firms within this segment are highly diverse, there are unlimited ways to categorize them according to their solution. On the next page, you can find a simple summary of the main existing types of fintech.
Some companies do not fit any of these categories, but they are still the minority among the universe of existing fintech. Due to how fast this segment has been growing throughout the past few years, not surprisingly, new categories should emerge soon. Among the new categories that have been emerging, two deserve special attention: the “Buy Now, Pay Later” and the Earned Wage Access. The first may be familiar to you, as installment plans are available for almost any purchase in certain countries, but not so much in others. In the middle of this year, for example, Apple announced a partnership with Goldman Sachs to provide customers with the possibility to use their Apple Pay to split the payment for their purchases into multiple installments. The second, however, is somewhat new in the market, and allows employees to have early access to their wages proportionally to the number of days they have already worked that month. These are two segments that may conquer their own space within the fintech sector in the near future.
The fintech market has been attracting unique attention from investors for over a decade and has received ten times more investments in 2020 compared with 2012. Fintech became representative in the venture capital market in terms of total transacted volume, deals closed, and quality of companies, being the most representative segment in both the amount and total value of unicorns compared to any other segment, according to CB Insights. The US leads the list of unicorns and is home to approximately half of the nearly 160 existing fintech unicorns, followed by the UK with just over 11% and China with nearly 6%. Brazil is tied with Canada in 7th position, with four startups known nationwide: Nubank, C6 Bank, Creditas, and EBANX.
Two birds of a feather
As companies grow, their capacity to develop or acquire integrated solutions to better serve their clients naturally increases. Investing in proprietary logistics or providing better customer support are some of the most common efforts organizations make to get to the next level in terms of relationships with their customer. However, a few years have passed since developing internal financial solutions or acquiring synergic fintech to straighten the relationship with customers also became somewhat popular.
Early this year, for instance, Walmart announced the creation of a fintech with Ribbit Capital aimed at offering financial solutions to its clients. The company intends to become even more present in its clients’ lives. Walmart will provide a solution to “have even greater share when it comes to consumers and their money, not just how and where they spend it, but how and where they manage it”, according to Greg McBride, Bankrate’s chief financial analyst.
Last year, Via Varejo acquired BanQi and Magalu acquired Hub Fintech for BRL 290 million, both aiming at leveraging on their massive client bases to explore opportunities associated with providing financial solutions to their customers complementarily to their core operations. Also, recently, Ame acquired Nexoos to be able to enter the B2B credit market without having to wait for months until the Brazilian Central Bank issued a license to enable it to operate as a loan provider.
Finally, the creation of WhatsApp Pay may be one of the most widely known cases of a large corporation creating a fintech to expand its scope of services by providing an additional financial service to its clients. With more than half of Brazilians currently using the app, the enterprise holds an enormous potential to leverage its financial solution in the country.
Providing complimentary financial solutions to customers is a trend that large companies from specific segments such as retail, healthcare, and even banking will hardly avoid. In line with that, some of our portfolio companies are already focused on offering solutions synergized with certain types of services. Future Family, for example, provides credit for egg freezing and in vitro fertilization treatments, enabling more people to have access to these procedures without having to deal with their high upfront costs. PayKey arrived in Brazil a few months after WhatsApp Pay and has already started helping its first client stay closer to its customers by enabling them to execute several financial transactions through the smartphone’s keyboard. Last but not least, Banco BS2 acquired Weel to consolidate itself as the first B2B neobank in Brazil, and JLL acquired Skyline to gain a competitive advantage in originating and analyzing real estate opportunities.
More recently, the opposite also started to take place, with fintech companies creating services that intersect solutions created by the industry. Future Family, for instance, may be classified by some as a healthtech, as its solution enables patients to get access to a treatment they wouldn’t naturally have. Skyline could also be considered a real estate company by some, given its focus on this specific industry. The possibilities of integration between fintech and the industry are limitless, to a point that it has already started becoming unclear whether some operations are closer to a fintech or to an industry-specific model.
The Brazilian lab
Throughout the past ten years, the number of deals involving Brazilian fintech increased remarkably, and the total capital raised by this type of startup exponentially grew in the country. In fact, São Paulo, the largest city in Brazil, has recently ranked at the 4th position in terms of fintech ecosystem size, only behind San Francisco, London, and New York, and ahead of cities such as Tel Aviv, Berlin, Boston, and Los Angeles.
This fact shouldn’t be surprising, though, given how friendly Brazil became to fintech willing to explore a large and sophisticated market, still not harshly competitive. By offering such a friendly financial ecosystem, Brazil became the perfect place for the expansion of top-notch fintech startups traditionally created in the US, Israel, and other regions widely known for their active venture capital and industry markets. The Brazilian financial system solidity is a consequence of consecutive years of multiple-digit inflation lived decades ago. It left a legacy of financial refinement that lasts until today.
Despite having a top-notch financial system that debunks even the ones in several first-world nations, Brazil still houses a small ratio of startups per inhabitant compared to other countries on the top of the list. The country ranks in 14th position on the list of the largest fintech ecosystems but has been conquering higher places year after year as more fintech emerge in its local market.
In addition to such potential and so much floor to be explored, the adherence to technology is culturally rooted in Brazil. Despite being substantially fragile in socio-economic development, the nation has nearly two digital devices for every inhabitant, which goes totally in favor of companies aiming at deploying new technologies on a large scale.
The apple of investors’ eyes
Fintech have been unquestionably attracting relevant attention from investors and have gradually achieved the reputation of one of the most promising types of companies within the venture capital market. Among the most relevant VC segments, fintech figure only behind Artificial Intelligence & Machine Learning in the evolution of the total value of deals concluded from 2012 to 2020. Given the consistent performance of this segment, there are no signs that the 2nd position will be lost to any other sector in the short term.
In addition to that, the lack of sophisticated financial services noticeably still affects a considerable number of countries, regardless of how technologically developed they are. The usage of recent technological solutions developed for medicine, data analysis and several use cases is more widespread than for financial services. Fortunately, though, this reality has already started to change recently, with unlimited opportunities to be explored in this field.
Finally, it’s important to remember that most of the services provided by fintech depend on some access to the digital world. On that matter, digital inclusion and banking trends have played a major role in developing more advanced financial services.
We are currently living what seems to be the next big trend in the financial world. And, looking ahead, the road appears to be flat and long before the first corner.